Unsecured lending: input by Banking Association of SA & National Credit Regulator

Meeting report

Banking Association of South Africa (BASA) briefing on the Unsecured Personal Loan Market
Mr Cass Coovadia, BASA Managing Director, said market analysis of Unsecured Personal Loan (UPL) showed that while there was still growth in the figures year on year, this growth was slowing down rapidly. Credit advances from September to the present had decreased because of weaker demand and because banks were careful in its lending practices. BASA had engaged with Treasury and had reached agreement with it on a number of points (see pp 8-10 of BASA presentation). BASA was convinced that there was no bubble in the economy. BASA was looking at the affordability assessments as they varied significantly across credit providers. Household debt to income ratios had decreased and compared favourably with the rest of the world. The debt service ratio stood at 11%. The NCR was also doing work on affordability. Banks had agreed to load payment data onto bureaus overnight. Individual banks did offer relief to qualifying customers. There was a need to relook at the use of emolument attachment orders and garnishee orders and the Regulator was doing work on the matter. The banks would support enforcement initiatives. Banks had agreed to clearing rules for debit orders. BASA had met with the entire credit industry and five working groups had been established and started work. A way to clamp down on unregistered lenders needed to be found. Banks disagreed on the proposal by the Select Committee on Trade to have an amnesty. It felt that the amnesty was incorrect because it created risk, which in turn would lead to increased loan costs or a decrease in loans provided. If people were misusing bad debt information then that issue had to be dealt with. The amnesty of 2007 had failed. More interaction was needed in this matter to provide a solution that was more productive than an amnesty and it recommended that the appropriate committee should put together a technical committee. He said UPL had been used to put food on the table and this was a socio- economic challenge. The NDP was an implementable document to address the underlying causes of consumers over gearing themselves.

Mr Cristoph Niewoudt, FNB Chief Risk Officer, said FNB supported BASA’s position and was committed to the agreements. The bulk of FNB‘s loans were mortgages at low margins and UPL was putting lenders at risk and therefore their homes. It supported the affordability guidelines. Currently smaller loans were getting preference to the larger mortgage loans and this was nonsensical. Emolument and garnishee orders facilitated the over gearing of customers.

Mr Gavin Payne, Head of Retail Risk at Nedbank, said the whole industry had to be part of the solution.

Mr Thamisanqa Sokutu, COO of African Bank, was concerned that UPL was being painted as the devil. African Bank was the pioneer in this type of loan at a time when those who needed it had no access to credit.
Now there was increased competition because big banks had entered the market. In August of 2012 African Bank was the first bank to recognise and indicate that there were increased risks in the UPL market. It had adjusted its lending practices and the growth had slowed down. People were using loans for home improvements, medical expenses, and education and therefore it served a need in improving the quality of life of its customers.

Mr Thabang Ndwandwe, Head of Banking Credit at Standard Bank, said the key issue was not secured versus unsecured lending but rather one of responsible lending to ensure that customers could afford the repayments. Stand Bank supported the call to re-look at the amnesty proposal put forward by the Select Committee. An amnesty would mean that pricing of loans would be at the maximum interest rate which was not good for customers.

Mr Donald Evans, of ABSA, said ABSA supported the BASA position and had pulled back in the granting of UPL. It said the focus should be on the rehabilitation of lenders rather than the granting of an amnesty.

Mr Christian Van Schalkwyk, Executive Risk Manager at Capitec Bank, said the Regulator should be fully staffed and resourced to regulate the country’s banking sector. The 2008 global economic crisis saw the demise of secured credit and the world of credit had changed completely. One should not go back to the past one should manage the future.

National Credit Regulator (NCR) presentation on the Unsecured Personal Loan Market
Ms Nomsa Motshegare, CEO of the NCR, gave an update on UPL since the last presentation she had made. Research had been undertaken to determine the factors causing the increase in UPL and its implications for the industry and consumers. It was concerned with the increase in UPL and the shift away from mortgage loans. On the credit supply side it was involved in developing affordability assessment guidelines, monitoring and enforcing compliance, reviewing market practise and credit provider internal controls. On the demand side it monitored overdue levels and promoted consumer education initiatives and worked with the dti to penetrate the rural areas. The year on year UPL growth had decreased from 49.3% to 38%. Mortgage loan year on year growth had decreased from 5.3% to 4.3%. There was a shift in UPL towards higher earning income groups, with the majority being in the R3500 – R30000 bracket, of which the R7000 – R15000 segment accounted for 37%. Consumers, generally, did not shop around for the best prices, with their focus more on the instalment amount. The average interest rate was 23.5%. 9.2m consumers out of a total 19.7m credit active users had consumer impairment records. The number of debt counselling applications was 374,379 of which 103,720 were loaded onto PDA’s and 77% of the latter made payments. Consumers were instalment driven and a task team had been set up to investigate the abuse of credit life insurance. Credit life cost was not disclosed as part of the cost of credit in an integrated manner. Draft affordability assessment guidelines would be issued. In conclusion she said there was a need to find a way to control and reduce the level and growth in UPL and for credit life insurance costs to be disclosed. More on-site visits to credit providers would take place.

Discussion
Mr Sokutu said that the National Credit Act had done great things for the regulatory status of the country but he was concerned that it appeared that there was no obligatory status on consumers to repay their debt. African Bank had conducted education programs and customers could not plead ignorance. People were only interested in the loan monies, not in education, when they made application for loans. It was essential for regulators to understand this.

Ms Nomsa Motshegare said the Select Committee amnesty proposal was a draft paper and an impact assessment had been done and the NCR was currently busy doing a study and reviewing it.

Mr Lesiba Mashopa, Company Secretary of the NCR, said that the NCR believed that it was appropriate to have the amnesty, but that it had to be different to the 2007 plan and include other interventions to solve the underlying problems that had created the indebtedness in the first place, following the global economic crisis. Job losses had caused the increase in UPL and the NCR was looking at the unhealthy growth in this sector of the market. 

Mr X Mabasa (ANC) said banks had to invest in educating their customers and unregulated lenders had to be discouraged.

Mr A Alberts (Freedom Front+) said banks needed to find a responsible way to lend.

Mr B Radebe (ANC) said the media reports over the weekend contained attacks on the NCR. The NCR’s call for the education of the public was critical because while banks shared equal responsibility, it was within an unequal social structure where illiteracy was prevalent.

Ms S van der Merwe (ANC) asked whom the people taking out loans were and what were they spending it on.

Mr G Hilton-Lewis (DA) said the NCR presentation was almost identical to the previous one and suggested that no progress had been made. He had also not received a written reply to a questions posed by him previously. When would the task team reach its conclusion? He wanted a copy of the impact assessment done by the dti. He said there was insufficient information on the scale of the problem of illegal loan sharks industry. How many illegal lenders had been prosecuted in the past year? Bank marketing was quite aggressive and should be made part of the agreements. There appeared to be not much progress on the NCA review. What was BASA doing?

Mr Coovadia replied that they were working with the NCR.

Mr W James (DA) said South African banking was divided into an informal and a formal sector. How could the informal sector be drawn into the formal sector. The amnesty call was a bad idea and indebtedness should be solved by focusing on the informal sector.

Mr N Gcwabaza (ANC) asked if the debit order was the most effective and least costly means of payment.

The Chairperson said the amnesty proposals were made because employment opportunities were related to the blacklisting of people.

Mr Coovadia said 67% of the population was involved in the financial services industry and South Africa was one of the best developing countries in financial services. There had been agreement not to overburden borrowers and so therefore they were against the amnesty proposal, as it could not overburden borrowers without good data. BASA supported the education initiatives and banks spent a fortune on customer education because it helped them manage and reduce their risk. It wanted to work with the NCR on the matter of unregulated lenders. If banks did not lend, people would be forced into the underground market because their need had not been satisfied. Banks wanted a robust Regulator and wanted to work together on strategic issues to prevent unintended consequences of legislation. Banks would value frequent structured interactions with the NCR from the earliest possible moment. He said the media comments he had made was that under the twin peak proposal, the Regulator would have to fall under the twin peaks and be accountable to the Treasury for coordination purposes, not because he was against the Department. All four big banks had interactions with the lower level of the market to bring them into the banking sector. Regarding the blacklisting, he said that if the credit bureau had issues which needed correcting, then that problem had to be sorted out.

Mr Niewoudt gave a historical overview of how unsecured personal loans had increased. He said a five percent increase in the interest rate currently would have a severe impact. Typical UPL margins were between 20 to 40% while mortgage loan margins were between 1 and 3%.

Mr Sokutu said 80% of people paid back their loans while the remaining 20% were divided into those who did not want to repay and those who through circumstances could not prepay their loans.

Mr Payne said the bulk of bank clients were employed people. There was good data to support this. However when it came to what they spent the loan on the data was a mixed bag depending mostly on what people indicated in their application forms, this reflected that it was for home improvements, medical expenses, education or debt consolidation.

Mr Ndwandwe said it was important to note that there would be a marketing response by banks because banks were entering into the lower end of the market. Banks complied with the Advertising Standards Authority and the National Credit Act. Banks also had their own internal policies. Bad instances of advertising should be dealt with on a case-by-case basis.

Mr Evans said banks did not force customers on what payment method to use but that debit orders were easy.

Mr Van Schalkwyk said the disclosure of the cost of credit was a regulated matter and the Regulator should prescribe how to deal with credit life insurance. Capitec bank did not charge for credit life insurance.

Mr Sokutu said other banks did charge for credit life insurance. Under the NCA it asked customers if they had insurance to cover the loan or gave them the option to buy insurance in house. It had received a short term insurance license from the FSB.

Ms Nomsa Motshegare said the NCR was regularising their meetings with BASA and the CEOs of banks. She said written responses had been sent to Committee members following the NCR’s previous engagement with the Committee. She said not all lenders were required to register but they had to comply with the regulations. The NCR conducted raids at pension payout points in a number of provinces to catch unscrupulous lenders.

Mr Andisa Potwana, Director of Consumer and Competition Law at the dti, said that the amnesty was for expunging the record of people who had fully repaid their loan but whose record remained on credit bureau books for five years afterwards resulting in them being unable to access finance even when their slate was clean or when applying for a job. The previous amnesty had had a different approach to the one envisaged this time. He said the dti would have completed its legislative deliberations had BASA not requested that they hold back. The amnesty was being coupled with the affordability assessments which would not generate reckless lending. The NCR was doing impact assessments currently on this matter. How much education was taking place on credit life and what was a reasonable price for credit life were matters that still needed consensus.

The meeting was adjourned.